What is zero-based budgeting?

• A. A process wherein funds are placed in a budget only to the extent that planned expenditures are justified in detail.
• B. A method to distribute funds evenly across all departments.
• C. A budgeting approach based on past expenditures with minor adjustments.
• D. A plan that sets budgets based on inflation and prior year growth.

Answer: (A)

Zero-based budgeting begins from a clean slate each budgeting period. Each expense must be justified as if it were new, with no automatic carryover from the previous year. Resources are allocated only to activities that are necessary and clearly supported by criteria such as cost, benefit, and alignment with goals, after evaluating and ranking different options. This stands in contrast to incremental budgeting, which nudges last year’s numbers up or down, and to approaches that spread funds evenly or rely primarily on past expenditures or inflation. So the description that funds are placed in the budget only to the extent that planned expenditures are justified in detail matches zero-based budgeting perfectly.